What is a credit rating and who uses them?
If you feel confused about credit ratings and don’t understand why they are important, you're definitely not alone. However, your credit rating can help determine whether you are successful in applying for things such as loans, mortgages, and credit cards, so it’s worth knowing how they work to help prevent you from running into problems in the future.
To put things simply, your credit rating is an indicator of how good you are at paying back loans or debts. Credit reference agencies collect relevant information from financial institutions and public records to put together reports on how well you have managed any credit in the past. This report is then used to determine whether you can take out more credit, such as credit or store cards.
The three main credit reference agencies in the UK are: Call Credit, Experian, and Equifax. These agencies sell their credit reports to lenders and credit providers, who then use these reports to establish whether you meet their credit criteria. The "credit rating" that's given in your report will also be used to determine the level of credit you can be offered.
When you apply for any sort of credit or loan, big or small, the lender is under no obligation to offer you any money. They will use your credit rating to decide whether there is any potential risk when it comes to your application. This assessment will determine the rates and conditions offered to you. For example, if you are upsizing your family home and are looking to take out a bigger mortgage, you may be deemed at risk to the mortgage provider if you have a poor credit rating, which means you could be turned down.
What sort of information is actually on your credit report?
Credit reports contain details of your credit history, such as dates relating to any credit accounts you have ever opened. Account details usually stay on your report for six years after the account has been closed or settled. So remember, even if you have closed an account, your credit report will still include the amount of credit limit or loan which was taken out, and more importantly, details of any missed payments.
Credit reference agencies also record searches every time a company or other organisation looks at your credit report. This means that every time you apply for credit, whether this is a loan or a standard credit card, that application is recorded. Remember to bare this in mind whenever you are thinking of making an application. Although the success of credit applications are not recorded, lenders may be able to guess the status of your application based on the credit accounts you hold.
It is also worth knowing that public records such as county court judgements, house repossessions and bankruptcies are also collected by the credit reference agencies. Again, these are usually kept for six years. In the case of a discharged bankruptcy, this should be wiped six years after the date you were declared bankrupt, and not six years after you were discharged.
If you don’t want your credit report to negatively affect your loan eligibility, the best thing you can do is to keep on top of your credit repayments, and always close bank or credit accounts which you no longer need. Imagine how you would feel if you were declined for that dream home mortgage because of missed repayments from your past, or old accounts you should have closed. Prevention is the easiest way to stop things like this happening, so always try to stay organised.
Although it might seem like there is an awful lot of personal information on your credit report, they do not contain details of criminal convictions, medical history or personal information such as race and religion. Details of family members also shouldn’t be included, but they will if you have any joint accounts. If you do ever set up a joint account, always be aware that the other person’s credit rating could affect yours in the future.
Salary and earnings are another factor which is not recorded, so a lender will never be able to determine whether or not they should give you any credit based on how much you earn. Although the name of your current account provider may be recorded, specific details of the account are not, unless there is relevant information such as use of an unauthorised overdraft. Because savings accounts are not a credit product, they also will not appear on your report.
How can you avoid damaging your credit rating?
How long you've lived at your current address can also play a part in your credit report. Although you can’t necessarily help this, a credit reference agency will usually look at your addresses from the past three years. If you move around a lot or have lived at your current address for less than six months, it could have a negative effect.
Another fairly simple factor is to make sure that you are on the electoral register. This is something that all credit reference agencies check, so even if you don’t actually wish to vote, make sure you are on the register if you are intending to take out any sort of credit or a loan.
Remember, you have the right to see the statutory credit files which are held by credit referencing agencies. If you think there are factual inaccuracies in the data, you can ask for the information to be removed or changed by contacting the agency directly. You can also add your own comments in the form of a Notice of Correction. These comments can make a big difference to how your credit report is interpreted. Therefore we recommend those who suspect they have a bad credit rating to be aware of this option.